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How to Buy an Existing Business

They occur when the target firm agrees to be acquired, which means its board of directors approves of the deal. Friendly acquisitions often work toward the how to acquire a company mutual benefit of the acquiring and target companies. Even when everything looks good on paper, every potential acquisition deal can go horribly wrong.

Before acquiring a business and doing anything, there has to be a good ‘why’.

You can also designate a company that provides registered agent services. This will come at a fee, of course; pricing for registered agents may cost more than a hundred dollars per year. Setting up a limited liability company (LLC) properly is one of the most important steps in establishing your business. An LLC can offer your business liability protection as well as other perks. In this guide, we will walk you through how to start an LLC in just seven simple steps.

  1. A sole proprietorship is the most simple method of business operation.
  2. Generally speaking, in the days leading up to a merger or acquisition, shareholders of the acquiring firm will see a temporary drop in share value.
  3. Often, relatively small companies with innovative products have difficulty reaching the entire potential market for their products.

In a few cases, acquisitions are based on the cost of replacing the target company. For simplicity’s sake, suppose the value of a company is simply the sum of all its equipment and staffing costs. The acquiring company can literally order the target to sell at that price, or it will create a competitor for the same cost. An acquisition generally describes a primarily amicable transaction, where both firms cooperate. A takeover, on the other hand, suggests that the target company resists or strongly opposes the purchase.

The SBA is a United States federal agency that helps small businesses get loans. The SBA doesn’t issue loans itself but works with lenders and other lenders to help them overcome obstacles to lending. This can include guaranteeing loans, reducing risk, and helping to source capital. At its core, the SBA funds, licenses, and regulates investment funds that can then lend to small businesses.

Here Are 3 Strategies Startup Founders Can Use to Approach High-Impact Disputes

You’ll also get to benefit from brand recognition, promotions, and marketing. But, it also means you have to follow rules from the larger brand about how you run your business. Such a company might look for promising young companies to acquire and incorporate into its revenue stream as a new way to profit.

Here is a step-by-step guide of how a startup acquires another company. Whatever industry you are in, expert knowledge is a valuable commodity. There will always be someone who knows more than you about different aspects of your business. Companies with a tried and true approach within your field likely have something they can teach your existing team. Mergers and acquisitions (M&As) are two methods by which businesses consolidate. They can often be lumped under the same umbrella, but they differ in terms of structure and implications.

She is passionate about economic development and is on the board of two non-profit organizations seeking to revitalize her former railroad town. Prior to joining the team at Forbes Advisor, Cassie was a Content Operations Manager and Copywriting Manager at Fit Small Business. If you are a freelancer or solopreneur, you may do fine with a simple sole proprietorship. We have various articles available for further reading if you are interested in additional information or resources concerning LLC definitions and the formation processes. There are even companies available to help you complete the paperwork and even handle yearly obligations on your behalf, such as annual reports.

How to Buy a Business: Everything You Need to Know

It also allows for flexible taxation options, as not all businesses operate in the same way. Some may elect for taxation as a sole proprietorship, but others may be taxed as a corporation. Once you have identified a potential target company, it is essential to conduct due diligence before proceeding with the acquisition. It includes investigating the company’s financial health, reviewing its legal documents, and assessing its business model.

Other reasons for acquisitions may include to enter a new market, gain market share, or even cut out the competition. Although large-scale acquisitions make big news, these deals are fairly common in the small- to mid-sized business market. An acquisition is a transaction wherein one company purchases most or all of another company’s shares to gain control of that company. Acquisitions are common in business and may occur with or without the target company’s approval. Even the most experienced entrepreneurs and business owners have them on standby to help out when the need arises.

How Mergers and Acquisitions Are Valued

When buying an existing business, this document will prove the actual sale of the business, officially transferring ownership of the business’s assets from the seller to you. For term loans and SBA loans for when you buy a business, banks typically require buyers to put down a 20% to 25% down payment on acquisition loans. However, the SBA recently made some changes that make it easier for buyers to obtain SBA 7(a) loans for buying a business. Now, the SBA requires the buyer to put down just 10%, and only half of that (5%) has to come from the buyer’s own cash.

Accelerate market access for the target’s (or buyer’s) products

But the reality is that many business owners buy a business or a company after it’s already been operating for some time. This comes with its own pros and cons, but buying an existing company is a great way to step into an ownership position right away. From 1993 to 2001, Cisco acquired 71 companies, at an average price of approximately $350 million. Cisco’s sales increased from $650 million in 1993 to $22 billion in 2001, with nearly 40 percent of its 2001 revenue coming directly from these acquisitions. By 2009, Cisco had more than $36 billion in revenues and a market cap of approximately $150 billion. Another acquisition deal known as a reverse merger enables a private company to become publicly listed in a relatively short time period.

Alternatively, the acquirer can provide its own shares to the target company’s shareholders according to a specified conversion ratio. Thus, for each share of the target company owned by a shareholder, the shareholder will receive X number of shares of the acquiring company. Acquisitions can be made with a mixture of cash and stock or with all stock compensation, which is called a stock-for-stock merger. Note that the shareholders of both companies may experience a dilution of voting power due to the increased number of shares released during the merger process. This phenomenon is prominent in stock-for-stock mergers, when the new company offers its shares in exchange for shares in the target company, at an agreed-upon conversion rate.

On the surface, these types of deals often appeal to Acquisition Entrepreneurs. Many burgeoning buyers enjoy finding sellers directly and circumnavigating brokers and competition from other buyers. The fact that someone else started the business shouldn’t dissuade you from buying it. It can actually be a great way to grow a company even more and improve the lives of all stakeholders within the business, from upper management down to the new intern.

This is because there’s a history of financial performance that a lender or investor can use to gauge how the business has performed to date and to predict future performance. Plus, there’s also existing data around the company’s market position, competitors, brand recognition and customer base. Bulk sale laws have to do with the sale of business inventory and are designed to prevent business owners from evading creditors by transferring ownership of the business to someone else. To comply, prospective buyers usually have to notify the local tax or financial authority about the pending sale.

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